Commentary on Budget 2016 Recalibration

Interesting realignment of Budget 2016. Many of the rumoured bad news on the Budget that were shared by netizens, especially anti-Najib supporters via social media had turned out to be false. Not a surprise, since the rumours were spread for a specific reason, to bring pressure on the PM ahead of the tabling of Trans-Pacific Partnership Agreement (TPPA).  But let's not get ahead of ourselves. Let anti-Najib supporters do what they love, while we dissect his budget realignment.

GST
A good move to maintain the GST at 6%.  Not only this is politically correct, but raising the GST now is economically not viable.

Why?

1. As the economy is slowly contracting due to tightening of belt, increasing tax will result in a worse knee-jerk reaction.  Spending will stop, and the economy will grind to halt. 
2. Increasing the GST will further encourage profiteering.  With the GST as a convenient scapegoat, unscrupulous traders will raise prices and blame it squarely on GST.  
3. Increased business cost as a change in tax rate will result in the need to re-calibrate POS machine nationwide. And it is too soon for a re-calibration. 

Ideally, tax rate could have been lowered, if the GST is higher than 6%.  But at 6%, the GST rate is already one of the lowest.  Thus lowering the rate will not result in much in reinvigorating the economy.

Fiscal Deficit Target of 3.1%
This is serious work by this government.  Focusing on economic deficit rather than trust deficit, I must say is a good move.  Whether they will meet this target or not, is remain to be seen.

Govt Revenue to be based on Brent at USD30 to USD35
This is rather optimistic, considering that Brent price had dropped below USD30 recently (though at the time of writing, this had increased to USD32 per barrel).

You know what is the funniest thing I read about this?  I just read somewhere (don't recall where) today that someone said that the budget is based of Brent price, but our petroleum is sweet blend. The poor bugger don't even know the difference! (Admit it, I don't even know how to differentiate them too, but I have a very reliable friend who had previously worked in the industry at a refinery).

Trimmed Budgeted Growth From 4 - 5% to 4 - 4.5%
The growth target is realistic, provided the planned stimuli works.

Govt Debt to be Reduced to 55% of GDP
I thought it was already lower?  Never mind, a bit too much work needed to dig out the figure.

Govt will not peg the RM
This is a good move.  Rather spending the fund to defend the currency, govt is allowing the market to determine the exchange rate and this frees up the fund for other more critical project.  Besides, I am still holding onto my belief that it is not RM that is depreciating, but that USD had appreciated uncontrollably instead.

Reduction of Employee Portion of EPF by 3%
Hmmm, this is one point that I disagree.  I had mentioned my disagreement on this before. Reduction of EPF only result in lesser funds available post-retirement.

However, I will not deny the potential benefit from this move.  For a normal salaryman with an RM2,000 pay, this move will give the salaryman another RM60 per month. While RM60 may seems to be small, even for the salaryman, this actually creates a multiplier effect within the economy.

How does Multiplier Effect works?
When a salaryman spends his additional RM1, the vendor/supplier will be getting an additional RM1. This makes available to the vendor/supplier an additional RM1 to be spent either on capital expenditure or operational expense. If the vendor/supplier uses the additional RM1 to be spent on an employee's salary, the employee will receive have an additional RM1 + 3% of his basic pay for spending. This will continue on in a circle, until it reaches the last person who decides to save the money instead of spending it.

Using RM1 as an example, the economy looks small.  But when you aggregate this in the society, a business may be getting sufficient volume to either hire a new staff or give raise to their existing staff.

In fact, I did note that at least 1 Opposition MP who had calculated that this move by the Govt will result in the economy will be getting an injection of RM8 billion, and will result in RM500 million GST.

Sorry, no link to the page.  Not good at the coding.

First, the RM8 billion figure did not come from the MP, but the PM's speech.  Assuming if all RM8 billion is being spent at standard rated items, this will result a massive tax of RM480 million tax (before refund of input tax).

And assuming that RM8 billion is correct, he does not understand the multiplier effect of an additional ringgit being spent in the market.  This means not just RM8 billion is going to be spent in the economy.  It means more than RM8 billion will be spent.

Econs Malaysia blog had shared an article way back in 2012 on multiplier effects in Malaysian economy, which in turn shares an article from World Bank indicated the multiplier effect in Malaysia is between 2.0 to 2.7, meaning for every RM1 spend, the fund will be generate a spending of RM2.70.  In case I have been accused of blindly leading and quoting the example, the same article mentioned that multiplier effects for Malaysian economy is slowly contracting.  Meaning, this move may soon be no longer useful for us to use in future.

You can read the article here.

But a credit to the MP, he did correctly point out that 70% Malaysians will have less than RM50,000 in their EPF upon reaching the age of 54.

RM2,000 Tax Relief for Those with RM8,000 per month Salary
This further strengthen the govt's shift towards helping the middle-income population, known also as M40 group. This move will have similar effect as the reduction of EPF deduction for employee.

At RM2,000 tax relief, this relief will largely be received by urban dwellers and middle-management for most organizations.  Govt estimates for this is an additional of RM350 million of funds for spending in the market.

Leaving the Best to the last
While these were not listed in the photo, the best part of the re-alignment of Budget 2016 are:

1. MyBeras programme where registered hardcore poor families will receive a provision of 20kg of rice.  This largely will offset the effects of removal of subsidies for rice and also frees up funds for the family to buy other essential goods.
2. Liberalization of AP for imports of certain essential goods.  Though announced as temporary, we might see this becoming a permanent feature, which hopefully will lower down the price of essential goods in future. 
3. Houses up to RM300,000 are for first-time house buyers only.  This will help to cool down the property market from crazy investors, I hope. 
4. For houses priced RM35,000 and below, BSN will be providing loans of up to 4% interest.  Good move to improve house-ownership. And considering that BSN recently came under fire for the memo not to give loans to oil & gas workers, this is a better move. 

There are other goodies too.  But, those are rather lengthy to discuss one by one.  So those others, you may read them on your own.  In fact, you can find the whole speech here.  I would recommend that you read this instead of relying on what I have summarized, or any other blogs. 

Oops.... Nearly left out the best part.

Govt is going to increase efficiency in tax collection.  Tax-evaders beware!